Do auditors respond when listed firms pledge shares? Evidence from China
ISSN: 0114-0582
Article publication date: 6 June 2023
Issue publication date: 25 October 2023
Abstract
Purpose
This paper investigates whether the audit fees of Chinese listed firms are associated with the share pledging practice of the firm’s controlling shareholders.
Design/methodology/approach
This study uses the audit pricing model to estimate the association between the share pledging of listed firms and audit fees. Cross-sectional analysis is conducted on a large sample of Chinese listed firms during the period 2004 to 2019. The authors further test the moderating effects of listing on the Main Board, state ownership and abnormal audit report lag on the association between share pledging and audit fees. The results remain robust to various endogeneity tests including two-stage least squares instrumental variable analysis, entropy balancing analysis and difference-in-difference analysis.
Findings
The study finds that audit fees are positively associated with the proportion of shares pledged by the listed firm’s controlling shareholder in China. The results also provide new evidence that the positive association between audit fees and the share pledging of controlling shareholders could be mitigated if the firm is listed on the Main Board and/or it is a state-owned enterprise. In contrast, pledged firms with abnormal audit report lag are found to have higher audit fees than their pledged counterparts without the excessively long audit delay.
Practical implications
Findings of this study have important practical implications to those charged with governance, as boards need to comprehensively understand the adverse consequences of share pledging when pursuing it as the firm’s major source of financing. The study also has policy implications for stock market regulators such as the China Securities Regulatory Commission in China. Regulators could consider developing a threshold-based share pledging disclosure and pledge ratio requirements based on factors such as a firm’s listing status and ownership structure.
Originality/value
This study provides new evidence on the audit-related consequences of share pledging in a significant capital market. Findings of this study also enrich the existing audit literature by introducing the share pledging activities of controlling shareholders into the audit pricing decision-making model.
Keywords
Acknowledgements
The authors are grateful for the valuable feedback received from anonymous reviewer and Dr Troy Yao, Editor of the Special Issue, as well as very helpful comments received from Professor David Hay, Professor Ahsan Habib and Professor Tom Scott at 2022 Auckland Regional Accounting (ARA) conference. The authors also greatly appreciate the constructive feedback received from paper discussant Associate Professor George Shan, and comments from Associate Professor Lin Liao and Dr Troy Yao at the Pacific Accounting Review – Special Issue Conference on 17 December 2022.
Citation
Kong, K.M. and Huang, H.J. (2023), "Do auditors respond when listed firms pledge shares? Evidence from China", Pacific Accounting Review, Vol. 35 No. 4, pp. 562-593. https://doi.org/10.1108/PAR-08-2022-0127
Publisher
:Emerald Publishing Limited
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